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7-Eleven plans to slurp up Southern California real estate

The convenience store chain says it will add 600 stores over the next seven years, a move that could save it millions because of the weak commercial land market.

July 24, 2009|Roger Vincent and Andrea Chang

In a move that could nearly double its Southern California footprint, the 7-Eleven convenience store chain is taking steps to lease up to 600 new locations in the region.

The company hired commercial real estate broker CB Richard Ellis on Thursday to begin scouting locations for a planned seven-year expansion that would add to the 800 stores that 7-Eleven operates from San Luis Obispo County to the Mexico border.

7-Eleven, a Dallas unit of Tokyo-based Seven & I Holdings Co., said that by launching so many stores in the middle of a crushing real estate downturn it will save millions of dollars on rent.

But can Southern California -- struggling in a recession that has caused other retailers to drop locations or even go out of business -- support all those Slurpees?

Buoyed by an uptick in convenience store sales nationwide and support from its Japanese corporate parent, officials at 7-Eleven say they want to restore the empire that the company reigned over before gas stations and other retailers moved onto their turf.

But the recession has been hard on the chain, which earlier this year laid off 200 non-store workers and said it would stop contributing to employees' 401(k) retirement plans. With upmarket convenience stores such as Famima making inroads and competition for late-night shoppers from local supermarkets, analysts say it could be tough for 7-Eleven to pull off such a huge expansion.

"It is difficult to see that there is a screaming need for more convenience stores," said analyst Richard Giss, a partner in Deloitte & Touche's consumer business division.

7-Eleven, which at its peak in the 1980s had about 1,500 stores in California, is banking on consumers' stopping in for chicken wings or a prepackaged sandwich instead of buying lunch out, part of a nationwide shift that has consumers shopping at Target instead of Nordstrom and taking advantage of dollar specials at fast-food chains.

By offering inexpensive food and other impulse items, said Jeff Lenard, spokesman for the National Assn. of Convenience Stores, 7-Eleven and its competitors can attract more business during downturns than other retailers.

"When you're thirsty, you don't check your 401(k)," Lenard said. "You just go in and buy a drink."

Lana Nardiello, a 23-year-old film editor who recently stopped at a Studio City location for a can of Red Bull and toiletries, turns to convenience stores in a pinch but doesn't patronize them regularly.

"It's an emergency kind of thing," she said. "It's convenient, but it's overpriced."

To succeed, analysts said, the company needs to continue attracting customers like Nardiello, but also reach out to those who might become regulars -- people gassing up at the locations that offer fuel and grabbing a Big Bite hot dog or a cup of coffee with breakfast or lunch.

7-Eleven has also moved to accommodate changing tastes in convenience food by upgrading its coffee bars and rolling in more nutritious selections every morning, said Dan Porter, vice president of real estate and new store development.

"We have a daily distribution of fresh sandwiches, salads, fruit cups, dairy products and bakery items made in local commissaries," Porter said.

7-Eleven also sells hot foods such as pizza, chicken tenders and nachos. In 2007 the chain launched a proprietary energy drink called Inked, meant to appeal to the young and tattooed.

Last year the company also introduced a line of products under its own brand -- including cookies, potato chips and jerky -- that are priced about 20% less than popular name brands.

What Porter jokingly calls "smokes and Cokes" still pull in the lion's share of customers, though.

One in three people who walk in the door buys a drink -- perhaps a 64-ounce Double Gulp or Slurpee -- while pricier tobacco products account for the biggest share of revenue, Porter said.

Southern California stores outperform the chain's national average, he said, suggesting there is demand for more of them. "We're very bullish on Los Angeles," Porter said, "because there are significant opportunities" for expansion.

Seven & I Holdings operates 35,000 convenience stores worldwide, including 7,750 7-Elevens in North America that it owns, franchises or licenses, according to the corporate website.

For the quarter ended May 31, Seven & I reported that its convenience stores worldwide had an operating income of $470 million.

From a California real estate standpoint, at least, the company's timing is good.

With many landlords struggling to find reliable tenants for their mini-malls and other retail spaces in a down real estate market, 7-Eleven is positioned to strike favorable leases for its franchisees in places that might not have welcomed them in recent boom years, real estate experts said.

"Clearly, the change in the economy has made space available that wasn't once available to 7-Eleven," said Naveen Jaggi, senior managing director at real estate brokerage CB Richard Ellis.

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